Hongkong Land Holdings says the city's surging rents may not give earnings a significant boost this year, as the leases it signed during the market slump in 2003 will still drag on rental income growth.

The statement from Central's biggest landlord followed yesterday's posting of a marginal growth in first-half earnings.

'With a falling supply, lowering vacancy in most of the good buildings in Central and firm demand, rents are likely to go up in the second half,' said chief executive Nicholas Sallnow-Smith. 'It does take time for positive reversion to work through our profit and loss account.'

About 20 per cent to 30 per cent of existing leases in Hongkong Land's property portfolio still suffer from 'negative rental reversion' - after the company renewed tenant leases at lower rates than three years ago.

Mr Sallnow-Smith said these leases, signed during the Sars outbreak two years ago, would be subject to renewal next year.

Hongkong Land saw rental income for commercial properties drop 6.81 per cent year on year to US$134.1 million in the first half, while residential properties remained flat at US$0.8 million.

But its net financing charges dropped 53.63 per cent year on year to US$11.5 million in the first half, helping boost overall earnings. Turnover fell 8.81 per cent year on year to US$180.2 million.

As a result, the firm posted an underlying net profit of US$105 million in the first six months of this year, up from US$104 million in the same period last year.

The underlying profit, excluding property revaluations, met analysts' expectations of between US$90 million and US$100 million.

Taking into account a revaluation surplus of US$1.31 billion, Hongkong Land posted a first-half profit of US$1.2 billion, up 53 per cent over the first half last year.

Despite falling rental income, BNP Peregrine Paribas regional property analyst Adrian Ngan Wai-hung said the outlook was still on the upside as the firm's expanding portfolio should boost its revenue stream in the future.

Rents in Central climbed 39 per cent in the first half of this year, thanks to improved economic fundamentals and increased corporate confidence, according to DTZ Debenham Tie Leung.

Hongkong Land said its vacancy rate in the first half had returned to its mid-1990s level of 3.7 per cent, down from 6.9 per cent at the end of last year.

It said rising interest rates were unlikely to affect its bottom line this year as 62 per cent of its US$2.29 billion debt had already been fixed through hedging contracts.

'Finance charges could be somewhat higher due to a higher interest rate. But that would not be very significant,' said Mr Sallnow-Smith.